Policy to Expedite Payments to Small Businesses Extended for Another Year

Yesterday, the Office of Management and Budget (OMB) extended the policy to expedite payments to small businesses for another year. See Extension of Policy to Provide Accelerated Payments to Small Businesses and Small Business Subcontractors.

This policy goes back to 2011 when the OMB established it for small business prime contractors. It became readily apparent however that many more small businesses were subcontractors rather than prime contractors so in 2012, OMB extended the policy to prime contractors so that they could, in turn, expedite payments to their small business subcontractors.

The payment goal for the Government under this policy is 15 days after receipt of all required documents. However, prime contractors are not obligated to the 15 day rule but by the terms and conditions of their subcontract documents. In any event, prime contractors should be endeavoring to abide by the intent of the policy. Unfortunately, many small business subcontractors have not benefited from the policy.

Perhaps that will change. The extension carries some reporting requirements that includes, among other things, quarterly reporting on the progress of any other steps that the agency has undertaken to ensure that small business contractors and small business subcontractors are paid in a prompt manner. In order to prepare such a report, agencies will need to engage their prime contractors to see how well they have implemented the accelerated payment policy to their small business subcontracts. The added oversight may help.

Government Policy on Accelerating Payments to Small Businesses Still Exists

Back in 2011, the Office of Management and Budget (OMB) began requiring agencies, to the fullest extent permitted by law, to accelerate payments to small business contractors with the goal of making payments within 15 days (instead of 30 days). This requirement was conditional upon contractors submitting all of the proper documentation, including invoices.

In 2012, realizing that there were a lot more small business subcontractors than there were small business prime contractors, the OMB required agencies to temporarily ensure that all prime contractors are able to pay their small business subcontractors in a prompt fashion. This temporary policy has been extended a few times and is now good until the end of 2016. More than likely, it will be extended again before this year ends.

So, how's it working? Are small businesses getting paid more quickly now than they were a few years ago? We don't know. And OMB doesn't know either. Anecdotal evidence suggests a mixed bag. We've talked with small business contractors that are surprised with the quickness they're receiving payment. We've talked with others that tell us that it's still taking close to 30 days. We've talked to still others who tell us the time for payment uexplainedly fluctuates between 15 and 30 days. That's for the prime Government contractors. For small business subcontractors its a different story. From what we can discern, accelerated payments are not significantly affecting them. Sometimes its because of subcontract terms such as "payments to subs will be made after the Government pays the prime".

OMB is planning to gather some data on how well the programs are working. It's asking each agency to provide quarterly reports on its progress in making accelerated payments to prime contractors and the progress of the agency's twenty-five largest prime contractors are making in accelerating payments to small business subcontractors. It will be interesting to see those reports. If you are a top twenty-five contractor for any Governmental agency, you can expect to be pinged by those agencies for data necessary to prepare these mandated reports.

What is the Prompt Payment Act (PPA)?

The Prompt Payment Act (PPA) has been around for more than 30 years. It was enacted back in 1982 amid frequent and vociferous complaining by Government contractors (and vendors, in general) that the Government wasn't paying their bills on time and as a result, disrupted contractors cash flows causing financial hardships. GAO stepped in and determined that the contractors complaints were well founded. In fact, GAO found that the Government's delays in paying its vendors were not isolated incidences but occurred frequently and consistently.

The PPA requires that whenever an agency fails to pay for goods and services by the required payment date, that agency must automatically pay interest on the amount owed. This applies as well to interim payments under cost-reimbursable contracts if payment is not made within 30 days after receipt of a "proper" invoice.

A proper invoice is one that includes all of the information required by FAR 32.905(b). For cost-reimbursement contracts, a proper invoice for purposes of 32.905(b) includes all of the information required by the contract. Well, that's not too helpful so one has to go to the contract's billing instructions for that kind of detail.

The Government has only seven days to determine whether an invoice is "proper". If it takes more than seven days and the invoice/voucher is rejected, those additional days are taken away from the 30 days in which the Government must pay before accruing interest.

Back in the day, when invoices were paper, there were often disputes as to when the invoice/voucher was received. That is no longer an issue with the on-line payments systems such as iRAPT (formerly WAWF).

The interest penalty is paid automatically. Contractors do not need to make requests. However, if the payment office fails to pay interest within 10 days of paying a late invoice, the contractor can make a written request for a penalty in addition to the interest. The written request must be made within 40 days of the actual payment date.

Interest is not paid under some circumstances including:

1. When payment is delayed because of a dispute between the Government and the contractor over the amount of payment or other issues concerning compliance with the terms and conditions of the contract.
2. For progress payments
3. When amounts are withheld temporarily in accordance with the contract
4. When an electronic funds transfer is not timely through no fault of the Agency.
5. When the interest penalty is less than one dollar.

Although interest payments should be automatic, we are aware of a few cases where the Government did not add interest to delinquent payments. Once the contractors inquired concerning the interest, the Government paid up. It is important that contractors know their rights and monitor payments to ensure they receive interest, when warranted.

Prompt Payment Interest Rate - Jan to Jun 2015

The Prompt Payment Interest Rate is slightly increased for the first six months of 2015. It has risen from 2.000 percent to 2.125 percent. This is the interest rate that the Government must pay contractors when it is delinquent, for whatever reason in paying for the delivery of goods or services, including progress payments and cost vouchers (i.e. public vouchers or WAWF submissions). It is often referred to as the Prompt Payment Interest Rate. It also applies to interest paid under the Contract Disputes Act.

This interest rate applies whether a contractor requests interest. In most cases, in the event payment on a voucher is delayed, the Government will add the interest. Generally, it begins accruing 30 days after receipt of an "adequate" voucher. Thus, if say the auditor rejects a WAWF submission because of an inadequacy, the clock doesn't begin until it has been revised and accepted.

Here's a table showing the interest rate history since 2012.

Some of you may remember the early 1980s with the astronomically high interest rates. The Prompt Payment interest rate peaked in 1982 at 15.5 percent. We were auditors back then and were continuously being cautioned not to do anything that would delay payments to contractors.

Click here for a complete table of historical rates.

Subcontractors and Suppliers Must Be Paid

Most contractors are familiar with the Prompt Payment Act of 1988 when it comes to receiving timely payments from the Government. Any billings, invoices, progress payments, or public vouchers not paid withing a certain period (typically 30 days) will begin accruing interest. The Government finance offices are extremely efficient in calculating interest and adding it to the invoiced amounts.

What is less well known about the Prompt Payment Act is its requirement for prime contractors, in turn, to promptly pay their subcontractors and suppliers after they receive payment from the Government. Failure to do so will require contractors to pay interest back to the Government.

For example, Part 32 of the Federal Acquisition Regulations (FAR) and the clause at FAR 52.232-5 (Payments Under Fixed-Price Construction Contracts), require that contractors under fixed-price construction contracts certify for every progress payment request  that payments to subcontractors and suppliers have been made from previous payments received under the contract and timely payments will be made from the proceeds of the payment covered by the certification, and that this payment request does not include any amount which the contractor intends to withhold from a subcontractor or supplier.

FAR Part 32 further requires that (i) contractors notify subcontractors and suppliers of any amount to be withheld and furnish a copy of the notification to the contracting officer, (ii) pay interest to subcontractors and suppliers if payment is not made by seven days after receipt of payment form the Government, and (iii) pay interest to the Government if amounts are withheld from subcontractors and suppliers after the Government has paid the contractor the amounts subsequently withheld.

Making timely payments to subcontractors and suppliers is the right and ethical thing to do, it helps maintain a healthy supplier base, and it helps avoid any contract performance problems. There are sometimes legitimate reasons to withhold payments to subcontractors and suppliers. There could be quality control issues, warranty issues, or any number of performance related reasons. When that happens, contractors must (i) not bill for the amount of the withholds and (ii) notify the contracting officer of the issue.

Accelerated Payments to Small Business Subcontractors

On July 11, 2012, OMB (Office of Management and Budget) issued a new policy directing that agencies should, to the full extent permitted by law, temporarily accelerate payments to all prime contractors, in order to allow them to provide prompt payments to small business subcontractors.

To implement this policy, OMB and the FAR Council developed a new contract clause to insert into all new solicitations and resultant contracts and, to the extent feasible, modify existing solicitations to insert the clause. Most agencies have now implemented the new clause including the big three, Defense, Energy, and NASA. The key part of the clause reads:

Upon receipt of accelerated payments from the Government, the contractor is required to make accelerated payments to small business subcontractors to the maximum extent practicable after receipt of a proper invoice and all proper documentation from the small business subcontractor.

The goal here is to expedite payments from 30 days to 15 days. This is only a goal however and does not confer any new rights under the Prompt Payment Act.

If you are a small business subcontractor and unaware of this new policy, contact your primes to get the program going.

Prompt Payment Interest Rate Drops to 2%

The prompt payment interest rate dropped again for the sixth consecutive semi-annual period. The new rate for the period January 1, 2012 through June 30, 2012 is a flat two percent. This is down from 2.5 percent from the previous six month period.

Any Governmental agency that has acquired property or services from a business concern and has failed to pay for the complete delivery of property or service b the required payment date must pay the business an interest penalty. This applies to public vouchers under cost-type contracts, progress payments under fixed price, as well as many other payment methods.

Under the prompt payment act, if an interest penalty is owed to a business concern, the penalty shall be paid regardless of whether the business concern requested payment of interest. Agencies calculate interest penalty with the interest rate in effect at the time the agency accrues the obligation to pay a late payment interest penalty.The interest penalty shall be paid for the period beginning on the day after the required payment date and ending on the date on which payment is made.